Thursday, October 3, 2013

What would happen to the US economy if we all got our financial house in order? , th

Last week, I harnessed the power of twitter, and tweeted Dave Ramsey. I know not everyone follows his plan, but P and I do. For us, it makes sense to save money, dump debt, and give to others. His plan is simple, easy to follow, and there is a clear ordered progression.

While 95% of what he does is focused on personal finance, he is knowledgeable in all areas of economics and has a finance degree, and understands complex economic and financial issues.

Given that we are in a fragile economic climate and given that our government and those charged with running it are acting like children, it seems as if we are on the edge of a cliff.

The question I posed was this: How would it affect the US economy if every family was debt-free?

The answer came in 2 parts:

Answer 1: If everyone were to dump all of their debt by the end of the year, the economy would collapse. So much of our economy right now is based on debt, that if we rid ourselves of it immediately, we would be in trouble.

BUT, its a big BUT, Answer 2 was very different.

Answer 2: If everyone began dumping debt now, and took a slow systematic approach, and in a 10 year period we weaned ourselves off of borrowing, the financial picture would look drastically different that it does today.

First, if over the next few years, we stopped using the credit card, and began to rid ourselves of the consumer debt, something drastic would happen---the middle class would begin to explode with wealth. When we are no longer sending payments + interest to credit card companies and are instead putting that money into investments and savings vehicles, our wealth and net worths would increase, drastically.

Additionally, he pointed out, that as people dump debt and amass wealth, they actually spend more once they are out of debt, rather than less, because they have more money to spend.

The consequence of this happening would be that certain sectors of the economy would either have to change or disappear. Credit card companies would either go out of business, or they would need to change their business and offer debit, rather than credit cards. Then, and one of the most beneficial consequences is that predatory lending companies would shut down. No more pay day loan companies that charge 36% interest on a 200.00 loan.

Second, once we rid ourselves of the consumer debt, and began to break our dependence on things like student loans, car loans, and mortgages, and pay cash for these things, the rate at which we amass wealth would rise exponentially. Studies have shown, that many of the wealthiest Americans, are now, and have always been overly generous givers. Imagine if the middle class was able to give 10% of their money to churches, missions, and charities. We, the people could help make poverty disappear, because as we begin to accumulate more wealth, we also begin to give more, because we have fewer payments. The private sector is much more capable and efficient at running operations and systems, because they have to be accountable. Think about this, if you found out that a charity you donated to had been misusing funds and not working towards its mission statement, you would STOP giving to them, and find another avenue to give to. That means that we really could and would see a decline in poverty.

This in turn, would begin to lift up the lower class, and would in effect begin to end the cyclical nature of the welfare system. The welfare system in our country is set up in such a way that it makes people dependent upon the government, and almost prohibits them from seeking out other wealth building avenues. If the private sector began to give in a big way, in the way that we should, we could eliminate the need for welfare, and begin to help raise each other up on our own, without having to depend on the government. This would allow us to shrink the size of government, and reduce the scope of their work. THEN, as we need them less, we would begin to take back control of our government and they would no longer wield power over us; we could then transition power back to where it belongs, the people.

Also, so much of the financial market is based on consumer confidence, that we have these major peaks and valleys. By creating a more stable and sustainable economy, we could begin to rid ourselves of the extremes and create a more stable financial market, which again, would lead to the building of wealth.

In the end, even Dave admitted that he does not think this is likely to happen, because we are going to continue to make poor choices, and behave in ways that make us vulnerable. It may be a pipe dream, but its a pipe dream worth shooting for.

It breaks my heart to see so many of us struggling. We live in the richest country this world has ever seen. We have the ability to make money, grow our wealth, and create opportunity for ourselves and for others.

I am passionate about personal finance, and financial coaching, If you need help understanding some of Dave's thoughts or principals, please feel free to leave me a comment or email me. I am not paid by Dave Ramsey to say these things, I have seen what his plan can do, and how it can change lives and family trees because it did for us.